Environmental Due Diligence and Appraisals during the COVID-19 Crisis

Posted by [email protected] on 04/28/2020 12:00 am  /   General

The COVID-19 pandemic has changed how banks, borrowers, and their supporting professionals conduct commercial real estate transactions. As financial institutions are being considered an essential business service in most geographies, many lenders are continuing to process loan applications. However, challenges exist in completing services supporting commercial real estate transactions such as environmental assessments and appraisals which has required providers of these services to implement methods to complete services while complying with government mandates without significantly compromising the quality of the service provided, or the safety of their employees or the public.

Environmental Due Diligence - (provided by Gabrielle Krawiec, LaBella Associates)

Most financial institutions retain and rely on environmental consultants to evaluate the environmental risk related to commercial real estate prior to lending. Although there are various types of environmental site assessments (i.e. Phase I Environmental Site Assessment, Transaction Screen, Records Search with Risk Assessment, etc.), properly evaluating environmental risk often relies on the environmental consultant having free access to the property being evaluated to observe conditions at the property, various other sources of information such as government records, interviews with property owners/occupants, and historical records often maintained and housed in municipal buildings such as a public library. Successfully completing environmental due diligence tasks may be challenging for the environmental consultant due to lack of access or access denial to a property, government agencies and other agencies relevant to property records being closed to the public, or unavailability of interviewees due to illness or stay at home orders. While many government record sources can share documents electronically, a significant number of government offices were still operating prior to the Covid-19 pandemic through entirely non-electronic means or limited electronic means. However, some government record sources have made efforts in recent weeks to accommodate requests sharing records electronically. Many environmental professional have adjusted to obtain information from government sources, historical records, or interviews exclusively through electronic means if supported by the source, purchasing information from third party data providers, or evaluating alternative internet based information sources as a replacement. Completion of a thorough property inspection is arguably the most difficult environmental due diligence related task admits closures and stay at home directives. Specifically, interior areas of hospitals, long-term care facilities, assisted living facilities, nursing homes, or senior living communities are not open to the public, and cannot be observed during the property inspection. In addition, interior access of multi-family residential properties may be denied by property contacts, or access to interior spaces maybe unadvisable to protect the health of environmental consult and the public/property occupants. Specific measures such as requesting property contacts open all doors prior to entering the building, visiting a property when it is unoccupied (i.e. completing inspections during the evenings or weekends), obtaining photographs of inaccessible areas via property contacts, wearing proper personal protective equipment, and maintaining social distance have been put in place in an effort to ensure that as much information is being collected as is feasible while still operating in a socially responsible manner. In addition, if project schedule allows for such, some clients may want the environmental consultant to postpone property inspections until restrictions have been lifted. Communication between environmental consultants and their clients is key. If the scope of work is limited due to current conditions such must be relayed to the client, and adjustments made as appropriate. Although this is a challenging time to be conducting business, if the environmental consultant has made the appropriate adjustments, with good client communication, environmental due diligence can be completed without significantly compromising the quality of the service provided.

Real Estate Appraisal(provided by Eric Lester owner/founder Lester Appraisal)

Today there are many, many issues in the real estate market which seem to be changing on a daily basis. During these uncertain times, real estate brokers are not showing properties and financial institutions are waiting on the sidelines, or are too busy deploying stimulus funds to chase new deals. Deals are however moving toward completion and are going to find a way to get done. They always have and they always will. Although brokers are discouraging direct contact between buyers and sellers, the upward trend is a reality occurring more and more in the local market place. Progressive lenders who have market awareness and experience understand this and are embracing it as a way of doing business. Those are the lending institution clients we are focused on working with during these uncertain times. Many appraisers are fearful that exterior only or desktop appraisals will be the end of the traditional appraisal as we know it. I however, love it and am choosing to embrace it. Exterior property inspections streamline efficiency on our end and we are able to pass that along to the client who is able to pass that along to the borrower in the form of a reduction in overall fees. Overall it is a win/win for the lender/borrower relationship, and the appraisal side too. This is a concept that that is becoming more and more of a reality moving forward. There is no internal reason why appraisal reports cannot be completed and delivered on our end and I am not going to consciously participate in standing on the sideline waiting for the uncertainty to be dismissed. Communication with our clients has become paramount as we find a way to help bring deals toward completion. This is a great time for business leaders to positively position themselves and key team members for market share within their industry. Investors have been losing sleep that have money stored in the stock market. Investors that have money stored in low risk strategic real estate investments in the local no bust/no boom market area have not seen any significant movement in value. We have been in a low interest rate environment for some time and protecting your assets in the form of a real estate investment has never looked safer for the time being. As we continue to venture further and further into unchartered territory we have remained focused on what is in our control and that is completing and delivering appraisal reports and evaluations to our lending customers so they can move deals towards completion. We are all about finding a way.